Topline declined 2% y-o-y due to lower RMC and white cement revenues

Ultratech Cement’s (UTCEM) Q2FY17 revenues declined 2% y-o-y to Rs 53.98 billion (our estimate: Rs 53.97 billion) due to lower RMC and white cement revenues. Grey cement volumes increased only 1% y-o-y due to heavy rainfall in its main markets. However, profit after tax (PAT) increased 31% y-o-y to Rs 6.01 billion as Ind-AS impact of Rs 750 million led to higher other income in Q2FY17.

Benefits of favourable cost curve eroding

Grey cement realisation increased 2% q-o-q (-1% y-o-y) to Rs 4,161/ton in a seasonally weak quarter. While some benefits of cost efficiency were reversed due to higher power and fuel cost (sharp increase in petcoke prices), we note that total unitary cost for the company was still down 7% y-o-y (+6% q-o-q) due to low-cost inventory. Ebitda grew 19% y-o-y to Rs 10.94 bn (our estimate: Rs 10.66 bn), leading to Ebitda/ton of Rs 992 (Rs 164 y-o-y, Rs 59 q-o-q) and margins of 20.3% (+360 pp y-o-y; -190 pp q-o-q).

Other highlights

Net debt is down by Rs 16.2 billion since end-FY16, with net cash of Rs 4.4 billion. The JPA deal has received approval from CCI and should be completed in next 5-6 months.

Management commentary

Management expects volume growth to pick up in 2HFY17, led by government-led infra spending, good monsoon and disbursement of the 7th Pay Commission-related wage hikes. Full impact of rising fuel prices would be seen
in Q4FY17.

Valuation and view

Industry dynamics are turning favourable, led by demand improvement, slowdown in capacity addition and higher consolidation. This would likely drive strong pricing improvement as utilisation levels (ex-south) are above 80%. Against this backdrop, UTCL is increasing capacity by 31% in next 12 months via JPA acquisition and entering the consolidated Satna cluster. Thus, the company (ex-JPA) is expected to see strong RoE expansion of 690 bp to 18% and Ebitda CAGR of 33% over FY16-FY18. The stock trades at 13.2x FY18e EV/Ebitda and $227/ton. Maintain buy with a target price of Rs 4,675 (15x FY18e EV/Ebitda).

Muted volume growth; Stable prices in seasonally weak quarter

Ultratech’s Q2FY17 domestic cement volume grew 0.5% y-o-y to 10.6 mt (est. – 2%y-o-y ), lower than industry growth. Pricing increase was higher than expectation at +2% q-o-q (-1% y-o-y ), with North being the strongest region. While the spot prices are marginally lower in North and other select regions due to festival season, we expect the same to pick up beginning November-16. Cement revenue stood were higher at R45.23 billion (flat y-o-y), while RMC and White cement revenues declined 5% and 20% y-o-y respectively. It translates into total revenue of R53.98 billion (-2% y-o-y).

Primary demand drivers in H2FY17 are increase in rural spending due to 23.5% hike in pay for Central Government Staff and good monsoon. Infra demand would be driven by government infrastructure projects and road construction. Other factors that would influence demand positively on infra segment are Delhi Mumbai Industrial Corridor, Mumbai Metro project, government irrigation spending and the Vizag Chennai Corridor.